Coronavirus in China Hits Global Supply Chain
The coronavirus outbreak in China hits the global supply chains hard and spurs sourcing away from the world’s manufacturing hub – a shift that started during the China-US tariff war.
Most Chinese cities restricted business activities and transportation. Companies are failing to meet their contractual obligations. They are applying for force majeure certificates China’s for the promotion of International Trade issued.
Companies that present these certificates to their counterparts may receive pardon from paying penalties for being unable to fulfill their obligations due to circumstances beyond their control.
A Shift that Began During China-US Trade War Spurred
In 2018, China’s total trade reached 30.51 trillion yuan ($4.4 trillion).
At the end of January, China announced the availability of force majeure certificates. Since then, the Council has issued 1,615 certificates in just two weeks.
According to the Xinhua state news agency, the certificates cover a total contract value of 109.9 billion yuan ($15.8 billion) worth of goods that could either cancel or defer fulfillment.
Chinese exporters are the most applicants; however, importers are also making inquiries.
Xinhua reported that demand for the certificates stretches over 30 sectors. But it underscores the impact the shutting down of cities and factories have on the international supply chain, trade, and shipping in China.
Dun and Bradstreet estimate that 90% of all active businesses in China are situated within affected regions, now formally named COVID-19.
According to commercial data and analytics consultancy, this would affect at least 56,000 companies around the world. Either it is affecting suppliers directly or in the first and second tiers.
Stanley Szeto says the outbreak has affected not only the manufactured goods but also raw materials used in making garments.
Stanley Szeto is the executive chairman at Lever Style, which is a clothing manufacturer. China is the world’s largest cotton producer.
Companies are not only able to ship, but they are also unable to make their deliveries.
For example, Wood Mackenzie- a commodity consultancy bluntly said in a recent report that LNG had dropped since January.
Rethinking supply chains
As business activities stutter to life following prolonged countrywide and factory shutdown, the supply chain, which started during the China-US trade, war is evolving.
Jeremy Nixon, the CEO of Ocean Network Express – a container shipping company, said retailers and consignees still wanted their products. Moreover, they were even making plans with their inventories.
Jeremy told CNBC that in some places in North America, inventories were quite low, so they needed to replenish.
He said city shutdowns and quarantines have led to labor shortages. This affects logistics such as pick-up and trucking- especially for refrigerated goods.
According to Reuters, ships ferrying refrigerated goods containers of chicken from the U.S. to China are diverting to ports in South Korea, Hong Kong, Vietnam, and Hong Kong. Refrigerated containers need a connection to electrical sources. However, ports are running out of space.
Nixon said retailers are starting to reconsider their supply chains as they continue to run low on inventories.
He also said buyers are moving on with more interest in out of Southeast Asia to compensate for the shortfall from China.
The strategy shift stems from the China-US trade war and increasing wages in China.
According to the Qima report, U.S. buyers had already started moving their sources away from China with inspection demand in 2019 down 14% from 2018. Qima is a Hong Kong-based supply chain inspection company.
Most manufacturing moved to Taiwan and Southeast Asia, where US inspections and audits grew 9.7% in 2019 from 2018. It also moved to Asia, where inspection demand grew 37% on year from 2018 to 2019.